1.

1 Define Economics
Economics is the study of the allocation of scare resources amongst competing ends. How people and society use scarce productive resources to produce commodities and services and distribute them for consumption amongst various persons and groups in society.

1.2 Define and give examples of resources, goods and services.

(i) Resources: Land Labor free gifts of nature (renewable and non-renewable) all physical and mental human effort (excluding entrepreneurial) Real capital or investment goods Manufactured aids to further production Tangible commodities: automobiles Intangible commodities: medical care, education

Capital

(ii) Goods: (iii) Services:

(iv) Production: The act of making goods and services i.e. Input Production Output

Catalytic agents 1. Entrepreneurial skill initiative, incentive 2. Technology doing more with less ( efficiency) 3. Money store of value, unit of account, medium of exchange

1.3 Define and explain Scarcity

Because each resource has an alternative use every resource usage requires:

(1) Choice sacrifice (2) Opportunity cost the cost measured in terms of other goods and services that could have been obtained instead.

1.4 Production Possibility Frontier (PPF)

all combinations of two goods that can be produced when the economys resources are fully employed using existing technology. Fixed Resources, Fixed Technology, Full-employment (efficiency) Picture PPF

Assume:

Increasing Opportunity Cost: As resources are shifted from one use to another the opportunity cost of each extra unit of one product increases. each individual unit of each factor is not identical and not equally suited to every production activity (i.e. persistent unemployment exists partly due to poor job matching). rational societies employ the best suited resources for a particular activity first. as production increases new resources shifted from other activities are less well suited.

1.5 Explain Economic Growth using the PPF

Growth 1. Increase in the resource base 2. New and better technology

Growth causes a shift of the PPF to the right. Additional resources better suited to the horizontal industry than to the vertical industry cause a non-parallel shift.

1.6

Demonstrate how todays PPF affects tomorrows PPF

The current position of the PPF influences the future location of the entire curve. i.e. reduced production of consumer goods frees resources for the production of capital goods. Capital takes time to produce but once it exists it increases the resource base (slow is fast!).

1.7 Formulate the basic questions posed by scarcity

1. 2. 3. 4. What to produce and how? What is consumed and by whom? Why resources are sometimes idle? Is productive capacity growing?

1.8 Distinguish between a command and pure market economy

There are three types of economies: 1. Traditional (feudal) Decisions are solved by appeal to tradition Decision makers: Religion, Family/Clan, Guild Motivation: Duty/service, Quid Pro Quo

2. Market Economy/Capitalism (i) Ownership: Private (right to bequest) Prices through competitive free markets Price Rationing Decentralized independent markets Enlightened self interest Utility maximization Profit Maximization Many Sellers Many Buyers Individual agents market power

(ii) Coordination:

(iii) Motivation:

(iv) Competition:

have

no

(iv) Limited Role for Government: Regulator Collective consumption goods Protection Justice System

3. Command Economy (i) Ownership: Collective (ii) Coordination: Central Planning Political/Bureaucratic Structures

(iii) Motivation:

Recognition Duty Fear

1.9

Modern Mixed Economies

A market is self organizing in the sense that individual consumers and producers act independently to pursue their own self interest, responding to prices determined in open markets, the collective outcome is coordinated and relatively efficient. Governments policies maintain the key institutions of private property and freedom of contract. The government creates laws of ownership and contract and then provide institutions to enforce these laws. Governments also intervene to correct market failures, provide public goods and protect society from externalities.

1.10

Explain the role of economic theory and analysis in economic planning

All governments have economic policies. Event the decision to not interfere with the workings of the free market is a policy decision. Analysing Public Policy is not purely ideological (vs. pragmatic) 1. What is the policy goal? 2. Does the present policy achieve the goal? 3. What side effects result from the present policy strategy? 4. Are their alternative policy instruments that will achieve the same goal?